| There is a lot of talk of inflation in the economic | | | | increasing their cost and so on. However, higher |
| news lately. What does it mean? | | | | interest rates also encourage people to save more |
| Most of us understand the basic idea of inflation -- | | | | and spend less, shortening demand and lowering |
| things cost more than they used to. In fact, that is | | | | prices on items. |
| pretty close to the Webster's definition. It is when | | | | For the most part, steady inflation is not seen on a |
| prices go up. For example, I remember when I could | | | | day-to-day basis. You usually only see it when you |
| put five dollars of gas in my little truck and drive for | | | | look back. I remember that 85 cent gasoline in high |
| a week. Nowdays, five dollars gets me less than two | | | | school. But you made a lot less in your job as well. |
| gallons of diesel. | | | | Why is inflation important to the individual? Well, |
| Inflation is at work. | | | | when you are planning for the long term, it can hurt |
| Inflation has been pretty steady. Just a nice climb. In | | | | you a bit. |
| general, inflation has remained at an average of 3% | | | | If you are 30 year old, you are around 30 years |
| for the past 30 years. We aren't doing that bad -- | | | | from retirement. You plan to retire at 60 with a |
| some countries have inflation above 1000% in one | | | | million dollars. That sounds like a lot of money. |
| year. | | | | It may not be. |
| Yes, sometimes it jumps, like in the 70's. But in | | | | Factor in 3% inflation for 30 years and your million |
| general, we are doing well. | | | | dollars will only buy you around $400,000 worth of |
| Okay, what causes inflation? | | | | goods and services. If you live 20 years after |
| Inflation can be caused by many factors. Increases in | | | | retirement, that's only $20,000 a year to live on. |
| taxes and government fees can lead to inflation. | | | | Sixty percent of your money has gone to inflation. |
| Things that cost businesses especially cause inflation. | | | | Can you live on that? You will need to save |
| When the cost of a business goes up, the product | | | | approximately $1.8 million and invest it at 5% after |
| prices go up. When prices go up on products and | | | | retirement in order to have the same amount of |
| services, your income goes down (you are spending | | | | spending money as you do now. |
| more of it). You have to work harder and longer to | | | | So remember, inflation does really affect you. You |
| afford the same things. Or hope that you get a cost | | | | should consider it when planning for the future. Other |
| of living adjustment. | | | | than that, there isn't much you can do. But you must |
| Which causes the business costs to go up and it all | | | | factor it in. |
| starts over again. | | | | A quick way to factor in inflation is to subtract the |
| Inflation also occurs when your personal taxes, | | | | 3% inflation rate from your assumed rate of return. |
| property taxes and sales taxes increase. You ask for | | | | For example, if you expect a 13% return on your |
| an increase in your wages. Then business costs go up | | | | investment, inflation takes it down to a 10% rate of |
| and so on. | | | | return. This will give you a picture of the value of |
| When things become rare, inflation can occur. The | | | | your investment. |
| more demand on an item, the more expensive it | | | | There are investments out there than benefit from |
| becomes. For example, if there is a drought and | | | | inflation, such as real estate and precious metals. |
| wheat does poorly, the price of wheat goes up. This | | | | Look into diversifying your portfolio into different |
| may cause the price of wheat products to go up. | | | | types of assets, not just different types of stocks. |
| If interest rates increase, inflation can also occur. The | | | | Inflation is simply a fact of life. By accounting for it, |
| cost to borrow money goes up for businesses, | | | | you are prepared to fight it in the future. |